Friday, March 11, 2016

Because we let immigrants and refugees into Canada to the tune of 1% of our population every year, while your country is a racist shithole.

Oh, and Canada's also not a world leader in money-laundering and tax evasion, while your country is leaving Europe because the City's in a snit that the Europeans are starting to fine EZ banks for illegal activites.

Well, that's annoying. I was pretty sure SPY was going to break down and do a retrace of some of its recent advance, either on Euro disappointment or in fear of a March rate hike. But this morning, the premarket is threatening a gap-up above the March 4 high, which would be a very bullish buy signal.

Well, we'll see what happens. I still need to study for my Micro exam tonight, and then I have all weekend to study for my Macro exam (which is on a basic intertemporal microfoundations model, so that's complicated enough), and then next week I still think the Fed has a nearly-50/50 chance of raising rates which should make the market piddle its panties real good if people are still being as silly as they were last month.

So I may as well sit tight on my small position and see what happens. An explosive pop should not be in the cards for the next few days, I reckon.

In the meantime, here's a bit of news:

Calculated Risk - energy expenditures as percent of consumer spending. Hint: they've gone down. And the only people suffering from this are the people who've spent the last decade living off the market rent generated by an artificially high oil price: oil companies, Arab kleptocrats, Russian kleptocrats, and rabid neocons. The world is better off without all of them, so don't shed a tear.

New Deal Demoncrat - updating the midcycle indicators. We're past the midpoint, but I'd ask him whether all that means is that we're on the tightening end of the cycle. Because... um... we knew that already.

WaPo - blather about the size of Draghi's bazooka. If you're looking for where the next ultracollapse is going to happen, look at Europe. The way to drag Europe out of depression is through fiscal support, not these insane monetary measures; all he's doing is giving Germany more scope for budget cuts, thus facilitating depression economics. But I guess Draghi wants to keep pushing on that string? Maybe someone's promised him a cushy job at the IMF if he just obeys Schauble?

The markets since January have, I would strongly suggest, been more driven by the price of other financial instruments than they have by changes in the underlying economy. Oil falling and rallying by 35% has not been because of a 35% change in physical supply and demand but on the expectation of what may happen. The moves in equity prices oscillating -20%/+10% have not reflected actual changes in profitability of companies but rather expectations based on moves in credit, oil and interest rates. The sharp move up in metals hasn’t been caused by smelters suddenly consuming masses more, but the change in expectation driving those who had borrowed to short to buy back to cover and those anticipating future demand rises to buy and store.

All the while the new driving force in the markets, algorithmic driven funds, look at the price actions around them in the finance tank and follow the trends. This whips up more moves in the finance world which leads to the algos noticing that the real world data is having smaller impacts relative to the actions of prices around them. They then rebalance the weightings of real world factors and focus more and more on price correlations. This drives the disconnect between finance and economic reality so far that the tank of finance is in danger of spawning off as its own budding universe of introspection and self importance leaving reality far behind.

Is this not what we are seeing? The year of 2016 has been relatively shock free as far as new issues go yet markets have been bonkers. It’s been like driving a car with loose steering linkages, with the steering wheel being swung hard left and right to just keep going in a straight line.

I agree that markets have been Little Miss Piddle-Panties for a long time now - since the August puke at least.

But as for algo-driven insanity? I'm sorry, I don't see the problem.

Stocks (and bonds and etc) have underlying values, so if algos are driving prices away from their underlying values, then they're producing an exploitable beta and you can capture it for yourself. All free candy gets eaten: isn't that a fundamental law of markets? The >10% discount to underlying of QQQ we saw in late August got gobbled up pretty quick, didn't it?

And if there are no smart algos out there already hunting and eating the stupid algos above, then Wall Street must not have hired as many physics Ph.D.s as everyone says they have. What science geek working in an algo shop wouldn't want to say "yeah, I'm the guy who designed the first hunter-killer algo"? No matter, Buffett'll do that work himself.

Worst you're suggesting is that people should use lower trailing stops. Or maybe keep more cash on hand to exploit crazy intraday ultrapukes.

But even that suggests there are large bowls of short-term free candy available in a market going up slowly long-term. That's also free candy waiting to get eaten.

Sure, the stock market is a cybernetic deathtrap: no properly engineered machine would have this many positive feedbacks built in unless you were looking to use it to nuke Hiroshima. But profit motive is the ultimate stability generator. It's only when the value of the underlying gets hammerblow torqued, like 2007-8 when investors woke up one day to find they'd been defrauded by the financial industry, that the market becomes unstable.

Wednesday, March 9, 2016

The market is probably going to dither for a while. First, they're going to be let down when they're reminded that Mario Draghi isn't going to waste his time pushing on a string when the Germans are fully committed to crippling austerity; then, they'll be a bit pissed if the Fed raises rates in March.

So there's not much to do news-wise, and I have midterms over the next few days anyway, thus the light posting.

FRBSF - what's up with wage growth. This has little direct application to the wage inflation question, but it does explain a few features/bugs in the data.

Mark Thoma - everything we teach undergrads about minimum wage is wrong. I'd just like to point out that (a) minimum wage earners are also consumers, (b) companies raise prices (and thus profit, and thus employment demand) on products with inelastic demand (i.e. necessities) when the marginal buyer (i.e. the poor) has more money, and (c) in any case, anyone who thinks the wage rate equals marginal product of labour in a competitive labour market has never worked in the real world. This is really so fucking simple I wonder why we get taught "minimum wage causes unemployment" in undergrad.